FIN 301 Prof. Thistle Principals of Managerial Finance Fall 2017 EXAM 1 VERSION B MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A friend plans to buy a big screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1. 1) A) $1,283 B) $1,604 C) $1,764 D) $1,444 2) Jay Coleman just graduated. He plans to work for five years and then leave for the Australian ʺOutbackʺ country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial ʺstakeʺ be when he leaves for Australia five years from now? Round off to the nearest $1. 2) A) $36,082 B) $24,725 C) $30,003 D) $27,178 3) California Investors recently advertised the following claim: Invest your money with us at 21%, compounded annually, and we guarantee to double your money sooner than you imagine. Ignoring taxes, how long would it take to double your money at a nominal rate of 21%, compounded annually? 3) A) 9.5 years B) 4.8 years C) 330 years D) 3.6 years 4) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firmʹs EBIT? 4) A) $5,110,000 B) $4,630,000 C) $58,000,000 D) $15,552,000 5) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)? 5) A) $1,048 B) $1,010 C) $808 D) $1,038 6) Which of the following statements best represents what finance is about? 6) A) How political, social, and economic forces affect corporations B) Reducing risk C) The study of how people and businesses make investment decisions and how to finance those decisions. D) Maximizing profits 7) All of the following operate as financial intermediaries EXCEPT 7) A) insurance companies. B) commercial banks. C) the U. S. Treasury D) mutual funds. 1
8) What is the value on 1/1/16 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $1.00. Date Cash Received Amount of Cash 1/1/18 $100 1/1/19 $200 1/1/20 $300 1/1/21 $400 1/1/22 $500 8) A) $1,500 B) $880 C) $968 D) $1,065 9) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years? 9) A) 8% B) 7% C) 6% D) 5% 10) What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%? 10) A) $775.40 B) $675.30 C) $424.60 D) $1,100.00 11) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years? 11) A) $3,408.88 B) $3,525.62 C) $5,008.76 D) $2,465.78 12) Maximization of shareholder wealth as a goal is superior to accounting profit maximization because 12) A) it considers the time value of the money. B) following the shareholder wealth maximization goal will ensure high stock prices. C) accounting profits are not the same as cash flows. D) A and C. 13) If you invest $750 every six months at 8% compounded semi annually, how much would you accumulate at the end of 10 years? 13) A) $22,334 B) $10,065 C) $10,193 D) $21,731 14) The true owners of the corporation are the 14) A) common stockholders. B) holders of debt issues of the firm. C) preferred stockholders. D) board of directors of the firm. 15) Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millersʹs return on equity. 15) A) 19.5% B) 17.5% C) 21.5% D) 23.5% 2
16) You buy a race horse, which has a winning streak for four years, bringing in $500,000 per year, and then it dies of a heart attack. If you paid $1,518,675 for the horse four years ago, what was your annual return over this four year period? 16) A) 18% B) 33% C) 8% D) 12% 17) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $8,750,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firmʹs net income? 17) A) $4,731,000 B) $7,775,000 C) $2,616,000 D) $255,223 18) What is the present value of an annuity of $27 received at the beginning of each year for the next six years? The first payment will be received today, and the discount rate is 10% (round to nearest $10). 18) A) $120 B) $100 C) $110 D) $130 19) Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Ginaʹs plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1. 19) A) $5,281 B) $75 C) $3,622 D) $1,497 20) Which of the basic financial statements is best used to answer the question, ʺHow profitable is the business?ʺ 20) A) Income statement B) Balance sheet C) Statement of shareholderʹs equity D) Accounts receivable aging schedule 21) A firmʹs average collection period has decreased significantly from the previous year. Which of the following could possibly explain the results? 21) A) Customers are paying off their accounts quicker. B) Customers are taking longer to pay for purchases. C) The firm has a stricter collection policy. D) Both A and C. 22) Which of the following is true about bonds? 22) A) Their interest rate always varies with the Consumer Price Index B) At maturity of the bond, the investor receives the market price of the bond. C) They are obligations from the investor to the corporation. D) They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year. 23) Firms that wish to raise funds for investment purposes issue securities in the 23) A) primary markets. B) primary and secondary markets. C) intermediary markets. D) secondary markets. 3
Table 1 Smith Company Balance Sheet and selected Income Statement data Assets: Cash and marketable securities $300,000 Accounts receivable 2,215,000 Inventories 1,837,500 Prepaid expenses 24,000 Total current assets $3,286,500 Fixed assets 2,700,000 Less: accumulated depreciation 1,087,500 Net fixed assets $1,612,500 Total assets $4,899,000 Liabilities: Accounts payable $240,000 Notes payable 825,000 Accrued taxes 42,500 Total current liabilities $1,107,000 Long term debt 975,000 Ownerʹs equity 2,817,000 Total liabilities and ownerʹs equity $4,899,000 Net sales (all credit) $6,375,000 Less: Cost of goods sold 4,312,500 Selling and administrative expense 1,387,500 Depreciation expense 135,000 Interest expense 127,000 Earnings before taxes $412,500 Income taxes 225,000 Net income $187,500 Common stock dividends $97,500 Change in retained earnings $90,000 24) Based on the information in Table 1, the net profit margin is 24) A) 2.94%. B) 4.61%. C) 1.97%. D) 5.33%. 25) Based on the information in Table 1, the current ratio is 25) A) 2.11. B) 2.23. C) 1.46. D) 2.97. 26) Based on the information in Table 1, the debt ratio is 26) A) 0.70. B) 0.20. C) 0.42. D) 0.74. 27) What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1). 27) A) $429 B) $3,106 C) $833 D) $893 4
28) Which of the basic financial statements is best used to answer the questions ʺWhat does the company own and how is it financed?ʺ 28) A) Income statement B) Statement of shareholderʹs equity C) Balance sheet D) Cash flow statement 29) What is the present value of a 5 year ordinary annuity with annual payments of $200 (at the end of each year), evaluated at a 15 percent interest rate? A) $ 670.43. B) $ 842.91. C) $1,169.56. D) $1,348.48. 30) An investment offers a 7% annual rate for the next 5 years. In order to maximize the future value of your investment, which of the following do you prefer? A) Daily compounding. B) Monthly compounding. C) Quarterly (every 3 months) compounding. D) Annual compounding. 5
1) B 2) D 3) D 4) A 5) A 6) C 7) C 8) C 9) C 10) A 11) C 12) D 13) A 14) A 15) B 16) D 17) X 18) D 19) D 20) A 21) D 22) D 23) A 24) A 25) D 26) C 27) A 28) C 29) A 30) A 6